Terence Corcoran: The straw dogs of Thomas Piketty’s capitalism

French economist Thomas Piketty is the new pied piper of the North Amercan left, and off the planet they go

The left has a new intellectual hero. He’s Thomas Piketty, a handsome young French economist who’s new book, Capital in the Twenty-First Century, has just been published in English by Harvard University Press, 695-pages of rollicking neo-Marxist agitprop against inequality and in favour of massive new taxes on the rich. The book is a sensation on the left, a nuclear target for the right, and an endless battlefield for economic theorists of all stripes.

If you haven’t heard of him yet you are not following North America’s leading purveyors of popular ideology: The New Yorker, The New York Times, The Week, The Nation, The National Review, The America Prospect. Hate it or love it — all are welcome from one end of that violent spectrum to the other — Capital is the economics industry’s tomb-raider of the 21st century.

Piketty rampages through two centuries of economic data and graphs, plunders ideas and theories from hither and yon, fills pages with pop culture references and CEO compensation lore, before settling down to contemplate his “utopian” idea: A global annual capital tax of maybe 2% on the assets of the rich and a marginal tax rate of 80% on incomes above maybe $500,000 — all necessary to ward off “the violent political conflict that inequality inevitably instigates.”

An ideological slugfest quickly built around the English edition of Capital, a title not coincidentally identical to Karl Marx’s famous work. Capital also instantly became mired in esoteric economic debate and academic infighting. James K. Galbraith, son of John Kenneth and a professor at the University of Texas Austin, immediately dragged Piketty out to the academic woodshed for, among other things, misrepresenting historic moments in the clash of economic ideas. “Piketty devotes just three pages to the ‘Cambridge-Cambridge’ controversies, but they are important because they are wildly misleading.”

Mr. Galbraith is himself an expert in inequality, and may well be miffed at having been ignored through acres of rambling Piketty prose.

Few members of the politically active left will be too troubled by Piketty’s Cambridge-Cambridge gaffes or the many other inside-economics flaws Mr. Galbraith and others have identified in Capital — although Mr. Galbraith’s summary is worth noting: “Despite its great ambitions, [Piketty’s] book is not the accomplished work of high theory that it’s title, length, and reception (so far) suggest.”

Indeed not. Instead of high theory, Capital is a tour-de-force combination of deep economic jargon, pop-culture analysis (how many other serious economic texts drop references to Dirty Sexy Money and other American TV shows) wrapped around a neo-Marxist class-warfare view of the world economy.

While Capital was translated from the 2013 French edition and Piketty is now a professor at the Paris School of Economics, he isn’t new to North America. He taught at M.I.T. and co-authored a 2010 study on the rise of inequality in America with Emmanuel Saez, the Berkeley economist who is the leading intellectual guru of the U.S. inequality movement. Piketty and Saez are guiding lights to scores of politicians, from President Obama to Canadian Liberal MP Chrystia Freeland, Justin Trudeau’s chief economic advisor. The 2010 Piketty/Saez study and the whole inequality myth were subject of three commentaries on this site here, here and here.

There’s a lot in Capital, but the book has three basic foundations. There’s the Marxist Set Up, the Capitalist Straw Dog and the Utopian Tax Plan. All the rest is elaborate if sometimes fascinating filler.

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In Capital, Piketty expands on the ideological story line that was slavishly adopted by Ms. Freeland in her own book on inequality, Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else. It begins with a set up in which Karl Marx’s ideas are explored, found somewhat wanting, and then adapted to form the crux of the main neo-Marixt theme. The rich are getting richer and taxes must be imposed to stop them from perpetual and infinite excess wealth accumulation.

Piketty says Marx, the intellectual godfather of Communism, was wrong in his claim that capitalism would inexorably lead to massive wealth accumulation by the 1% while the masses continued to struggle in near-poverty under conditions that “were just as miserable as before.” That’s not what happened. Expanding free markets and capitalism raised living standards dramatically, a development that Piketty demonstrates throughout his book.

But that doesn’t mean Marx should be abandoned. Despite the obvious limitations and flaws in Marxist theory, “Marx’s analysis remains relevant in several respects,” says Piketty.

Piketty calls for 80% marginal tax rate and global tax on wealth of up to 2%

One of those respects is the degree to which income and wealth inequality appear to be increasing and, he predicts, will continue to expand dramatically in the future in a global economy marred by slow growth. “If the rates of population and productivity growth are relatively low, then accumulated wealth takes on considerable importance, especially if it grows to extreme proportions and becomes socially destabilizing.”

Much data is presented, but the real question is not whether any or all of Piketty’s graphs, tables and 600-pages of inequality analysis are true. The question is: Why does it matter? Never discussed are the underlying assumptions that inequality is morally, politically, ideologically or socially wrong. With no supporting argument, Piketty claims inequality is “quite disturbing” and “may be high enough to be destabilizing.” The long-term dynamics of wealth distribution are “potentially terrifying.”

If true, it would only be the result of economists and others constantly fanning the old standard human emotion: envy.

Capitalist Straw Dog

If Marx was fundamentally wrong and capitalism delivered the goods in terms of rising living standards, Piketty needed a counterpunch argument to support the Marxist idea that inequality demands new taxes on the wealthy. He finds it in the work of Simon Kuznets, a 20th century Nobel economist who helped the United States develop national income statistics and wrote extensively about economic growth.

But Kuznets became perhaps more famous for a theory about income distribution that became known as the Kuznets Curve. As an economy grows, inequality grows up to a certain peak at the top of the curve (see illustration). But as a market economy matures, inequality starts to decline and, in the abstract curve, tends towards equality.

As Piketty tells it, the Kuznets Curve masks a dark reality economists have ignored. “For far too long economists have neglected the distribution of wealth, partly because of Kuznets optimistic conclusions.” Inequality should, he says, become “central” to economic research and analysis to replace the Kuznets capitalist fairy tale.

This is misleading. Kuznets has never been a core part of any capitalist theory. After setting up the Kuznets curve as a capitalist straw dog, Piketty ignores or dismisses 99% of market economic theory. Adam Smith and Jean-Batiste Say are tossed out in one sentence. Milton Friedman is walked over. Hayek gets dissed in a footnote.

No capitalist economist ever claimed a market economy would produce income equality, nor should it. Milton Friedman said several decades ago: “If instead of looking at income, you look at levels of consumption, if anything that’s become more equal…In respect to consumption, it’s very hard to avoid the view that people have been getting more equal rather than more unequal.”

Another great market economist, Ludvig von Mises, was more direct. “The inequality of incomes and wealth is an inherent feature of the market economy. Its elimination would entirely destroy the market economy.”

Piketty concedes that capitalist growth has improved living standards around the globe. In wealthy countries, living standards have increased 20 times over the last three centuries. The future, however, may be different, he says. If growth slows, the capitalist fantasy of increasing equality will be replaced by what Piketty repeatedly refers to as a looming Marxian-style revolt of the discontented masses.

The Utopian Endgame

To avoid such a crisis, Piketty turns to his Marxian tax-the-rich program. “Levying confiscatory rates on top incomes is not only possible but also the only way to stem the observed increase in very high salaries.” The optimal top tax rate, he says, is probably 80%.

Then, deep in Capital, comes his plan for a global tax on wealth, which he calls “A Useful Utopia.”

Sample: A capital tax would be applied at a rate of up to 0.5% on “fortunes” under $1.5-million, 1% on fortunes up to $7.5-million, and rates of up to 10% on fortunes of several hundred million dollars. “This,” says Piketty, “would contain the unlimited growth of global inequality of wealth.”

Piketty offers another argument for taxing the wealthy that “should not be neglected,” he says. If governments were to impose a 1% tax on the capital of a multi-millionaire who earns 10% on his investment, the 1% burden would be relatively light. But what about somebody who is only earning 1% or 2% on investments? “The purpose of the tax on capital is thus to force people who use their wealth inefficiently to sell assets in order to pay their taxes, thus ensuring that those assets wind up in the hands of more dynamic investors.”

By now Piketty is beginning to sail off the planet of economic common sense and into deep Marxist and central planning territory. Which is where he belongs.

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